Economic Outlook
Fundamentals Moderating As Expected, Still Trending Up
Economic releases have moderated of late. This coincided with rising expectations in the marketplace that things would accelerate, causing some uncertainty on the part of investors who were rapidly growing more comfortable with risk.
In a number of sectors, we experienced a V-shaped recovery since early 2009. We have felt that this was unsustainable, and that growth would moderate – held back by deleveraging, slower labor-force growth and continued adjustments in the financial sector. We believe that this may turn out to be a “square-root” shaped economic recovery, with a sharp rebound from the depths of risk-averse behavior followed by a moderate and sustainable improvement going forward. Of course, that assumes there are no major policy errors by the central bank, the U.S. Treasury and Congress.
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Market Volatile As Momentum Investors Curtail Their Enthusiasm
The market has recently been driven by investors with short time horizons and even shorter attention spans. Focusing on recent price shifts rather than fundamental factors, they are fickle and seem to believe that yesterday’s price action is the best predictor of tomorrow’s direction.
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U.S. Treasuries Rally As Investors Seek Safety
Concern about Europe’s sovereign debt and questions about global growth rates impacted the U.S. and global bond market in the second quarter. In a bid for safety, investors sought the shelter of low-risk debt issued by the U.S. Treasury over riskier asset types. This meant the yield difference (the spread) between U.S. Treasury bonds and riskier corporate, municipal and high-yield markets widened after narrowing in 2009 and the first quarter of 2010.
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